CBSE Class 12 Economics HOTs Economics Forms of Market and Price Determination Set 03

Question. What is meant by double counting?
Answer: The counting of the value of a commodity more than once is called double counting. This leads to overestimation of the value of goods and services produced.

Question. What is meant by value added method?
Answer: Value added method is that method which measures the contribution of each producing enterprise to production in the domestic territory of the country.

Question. What is meant by income method?
Answer: Income method is that method which measures national income as the sum total of factor incomes (compensation of employees, rent, interest and profit) earned by normal residents of a country during an accounting year.

Question. What is meant by expenditure method?
Answer: Expenditure method is that method which measures national income in terms of the expenditure (consumption expenditure + investment expenditure) on the purchase of final goods and services produced in the economy during the period of an accounting year.

Question. Define GDP at market price.
Answer: GDP at market price refers to market value of final goods and services produced within the domestic territory of the country within one year, inclusive of depreciation.

Question. Define NDP at market price.
Answer: NDP at market price refers to market value of final goods and services produced within the domestic territory of the country within one year, exclusive of depreciation.

Question. Define GDP at factor cost or gross domestic income.
Answer: GDP at factor cost or gross domestic income is the sum total of (i) compensation of employees, (ii) operating surplus, (iii) mixed income and (iv) consumption of fixed capital, within the domestic territory of the country during the period of one year.

Question. Define NDP at factor cost or net domestic income.
Answer: NDP at factor cost or net domestic income refers to the sum total of factor incomes (rent + interest + profit + wages) generated within the domestic territory of a country during a year.

Question. Define GNP at market price.
Answer: GNP at market price refers to market value of final goods and services produced during the year along with net factor income from abroad and consumption of fixed capital.

Question. Define NNP at market price.
Answer: NNP at market price refers to market value of final goods and services produced during the year, inclusive of net factor income from abroad but exclusive of depreciation.

Question. Define GNP at factor cost.
Answer: GNP at factor cost refers to the sum total of factor incomes (rent + interest + profit + wages) earned by normal residents of a country during the year, along with consumption of fixed capital.

Question. Define NNP at factor cost.
Answer: NNP at factor cost refers to the market value of final goods and services produced within the domestic territory of a country during the period of an accounting year, inclusive of net factor income from abroad but exclusive of depreciation and estimated at factor cost.

Question. Define factor income from abroad.
Answer: Factor income from abroad is the factor income earned by our residents who are temporarily residing abroad. Example: Salaries of Indians working in Russian embassy in India.

Question. Define factor income to abroad.
Answer: Factor income to abroad is the factor income earned by non-residents who are temporarily residing in our country. Example: Salaries of Americans working in Indian embassy in America.

Question. What is national debt interest?
Answer: National debt interest refers to the interest payments accruing to residents of the country on account of borrowings by the government. The government borrows money from the people (by issuing bonds like National Saving Certificates in India).

Question. Give the meaning of non-market activities.
Answer: Non-market activities refer to those activities which are not performed through exchange or which do not involve sale of goods and services, e.g., a teacher teaching his own son, services of housewives, etc.

Question. What must be added to domestic factor income to obtain national income?
Answer: Net factor income from abroad.

Question. When is gross domestic product of an economy equal to gross national product?
Answer: Gross domestic product (GDP) of an economy is equal to gross national product (GNP) when net factor income from abroad is zero.

Reason-based Questions 

Question. Transfer payments are included in the estimation of national income.
Answer: False. Transfer payments are not included in the estimation of national income because transfer payments are unilateral payments. These are not related to factor services rendered by the residents of a country.

Question. National income is the sum total of factor incomes earned by normal residents and non-residents of a country during the period of an accounting year.
Answer: False. National income is the sum total of factor incomes earned by the normal residents of a country during the period of an accounting year.

Question. The Indian people employed in World Health Organisation located in India are non-residents of India.
Answer: False. The Indian people employed in World Health Organisation located in India are normal residents of India.

Question. Income earned by foreigners working in branch of a foreign bank in India is a part of the domestic factor income of India.
Answer: True. This is because the branch of a foreign bank is located within the domestic territory of India.

Question. Money received from sale of shares is included in domestic factor income.
Answer: False. Money received from sale of shares is not included in domestic factor income because sale and purchase of shares only causes change of ownership of financial assets. There is no value addition in terms of flow of goods and services in the economy.

Question. Depreciation is added to gross domestic income to obtain national income.
Answer: False. Depreciation is subtracted from gross domestic income to obtain national income.

Question. Scholarship given by Government of India is included in national income of India.
Answer: False. Scholarship given by Government of India is not included in national income of India. Because, scholarship is a transfer payment.

Question. Depreciation is the basis of difference between the domestic income and national income.
Answer: False. The basis of difference between the domestic income and national income is net factor income from abroad.

Question. Domestic product can be more than national product.
Answer: True. When net factor income from abroad is negative, domestic product would be more than the national product.

Question. Salaries to Indian residents working in German embassy in India is included in domestic income of India.
Answer: False. Salaries to Indian residents working in German embassy in India is not included in domestic income of India, because German embassy in India is not a part of domestic territory of India.

Question. Profits earned by a company in India, which is owned by a non-resident is included in national income of India.
Answer: True. Profits earned by a company in India, which is owned by a non-resident is a part of domestic factor income of India, because the company is generating profit within the domestic territory of India. Therefore, as a component of domestic income, it is included in national income of India.

Question. National debt interest is included in national income of India.
Answer: False. National debt interest is not included in national income of India. Because it is treated as a transfer payment.

Question. The salaries received by Indians working in branches of foreign banks in India is included in the estimation of domestic income.
Answer: True. Salaries received by Indians working in branches of foreign banks in India is a part of domestic income because these branches of foreign banks are located within the domestic territory of the country.

Question. Factor income from abroad is a part of domestic factor income of India.
Answer: False. Factor income from abroad is not a part of domestic factor income of India, because it is not generated within the domestic territory of India.

Question. Interest paid by banks to Rohit on his deposits is included in national income.
Answer: True. Interest paid by banks to Rohit on his deposits is included in national income because banks are expected to have used Rohit's saving for productive purpose.

Reason-based Questions 

Question. Both value added and value of output are identical concepts.
Answer: False. Value added and value of output both are different concepts. Value of output refers to the market value of the goods produced. While value added refers to the market value of the goods produced minus market value of the goods used as inputs/raw material in the process of production.

Question. Sum total of value added by all the producing units within the domestic territory of the country is equal to national product.
Answer: False. Sum total of value added by all the producing units within the domestic territory of the country is equal to domestic product.

Question. Sum of value added is equal to sum of factor incomes.
Answer: True. Sum of value added refers to the value of final goods and services produced in the economy during the period of one year. Net value added at factor cost implies cost of the factors of production in terms of rent, interest, profit and wages. This is equal to income generated. Hence, the fact that value added is identical with income generated.

Question. Exports are included in the estimation of national income.
Answer: True. Because exports are a part of goods and services produced within the domestic territory of a country.

Question. For calculating gross domestic capital formation, we do not add change in stock to gross domestic fixed capital formation.
Answer: False. We do add change in stock to gross domestic fixed capital formation for calculating gross domestic capital formation. Change in stock is treated as inventory investment.

Question. Retirement pensions are included in the estimation of national income.
Answer: True. Because retirement pensions are a kind of deferred wage.

Question. Expenditure on second hand goods is not included in the estimation of national income.
Answer: True. Expenditure on second hand goods is not included in the estimation of national income because value of second hand goods has already been accounted during the year of their production (when these were initially produced and purchased by the final users).

Question. Payment of income tax by a firm is not included in the estimation of national income.
Answer: True. Because income tax by a firm implies corporate tax. It is a transfer payment by the firm to the government. It is paid out of income and therefore, not to be separately added in the estimation of national income.

Question. Festival gifts to employees are included in the estimation of national income.
Answer: False. Festival gifts to employees are not included in the estimation of national income because gifts are transfer payments.